The US equity market is on fire this morning, with the S&P 500 opening above $3400 for the first time ever.
More precisely, some of the largest US Tech stocks (Apple, Facebook, Google, Amazon) that have powered much of the US equity market recovery over the last few months are storming ahead, while gains in the rest of the S&P 500 are a little more muted.
Still, things are very positive at the start of the week, with risk on also being seen in crude oil markets (prices are up), bond markets (bonds are down) and FX markets (USD and JPY are down).
Why are markets so risk on?
1) Weekend news flow was upbeat
- On the Covid-19 front, we had good news this weekend; US daily case count has fallen to the low 30ks (remember, back in July as much as 70k cases per day were being reported). Meanwhile, over in Europe, cases are up yes, but the rate at which cases were going seems to have slowed. In terms of treatment news; the US FDA has permitted emergency use of recovered Covid-19 patients blood plasma in treating the sick, with the treatment associated with a 35% decrease in mortality (though the FDA still wants to do much more testing). This follows the news last Friday that Pfizer and BioNTech might have a vaccine ready for approval as early as October, with the potential for 100mln doses to be ready by the end of the year.
- On the global trade front; US President Trump delivered familiar hawkish remarks on China, and reiterated threats that the US could economically “de-couple” from China. But, like I said, we have heard this many times before. The actual actions we saw over the weekend from the US on trade were much more positive, with the US and EU engaging in a small de-escalation of tensions (the EU have axed import tariffs on US lobsters, and the US have halved import tariffs on $160mln worth of European goods including glassware and lighters). A small deal, but a positive step in the right direction, demonstrating that constructive steps between the trans-Atlantic powers is possible under US President Trump.
2) Markets clearly feeling upbeat about V-shaped recovery prospects
Much was made by analysts this morning about how, over the past week, “economic surprise indices” (various indices calculated based on by how much recent data has exceeded/missed market expectations) have hit all-time highs, even with that disappointing EU data last Friday.
Expectations for a V-shape recovery are clearly alive and well then, as demonstrated in today’s price action. Though last week’s FOMC minutes underwhelmed (markets wanted something a little more dovish than what they actually got), no one can deny that with rates at near zero, $80bln in QE per month, direct lending to the real economy and the USD liquidity hose at the ready, the FOMC is still VERY dovish at the moment.
Therefore, a sense is seemingly growing that, even if Powell does not explicitly signal a move towards average inflation targeting (as many market participants want him to), signalling that the FOMC will tolerate above target inflation for a time ought to be good enough to keep risk assets afloat. It has certainly been enough to get inflation expectations back up to where the Fed wants them (above 2%) in recent weeks, as indicated by money markets.
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